July 4, 2009 - Ukraine is home to some of the world’s cheapest cigarettes — at $1.05 per pack — making the country a bonanza for smugglers. Loads move by car, truck, bus and train, bound for other European countries where high taxes make packs cost as much as $5 (Germany) or $10 (United Kingdom).

The world’s four leading multinational tobacco companies, Philip Morris International, Japan Tobacco International (JTI), Imperial Tobacco, and British American Tobacco (BAT), have produced billions of excess cigarettes in Ukraine, fueling a teeming black market that reaches across the European Union. Today, Ukraine is rivaled only by Russia as the top source of non-counterfeit brand cigarettes smuggled to Europe, EU officials say.

The growing traffic pushes huge supplies of cheap, untaxed, and unregulated cigarettes into the rest of Europe, undercutting otherwise successful attempts to curtail smoking. Worse, officials say, the trade is boosting organized crime gangs, who find the soft penalties and big profits hard to resist.Each year, Ukraine’s cigarette consumption and legal exports top 100 billion sticks, according to Ukraine’s Ministry of Health. Yet in 2008, tobacco companies manufactured and imported nearly 130 billion cigarettes — 30 percent in excess of what the local market can consume. These “extra” cigarettes disappear in the market, feeding an illicit trade that is worth, conservatively, $2.1 billion annually. Ukrainian cigarette production, meanwhile, has steadily risen since 2003, according to an analysis by ICIJ of data compiled by SOVAT, a tobacco and alcohol industry association, and Ukraine government statistics. In fact, cigarette production in Ukraine increased one-third between 2003 and 2008 — from 96.8 to 129.8 billion — with JTI and Philip Morris leading that trend.

Internet merchants are also making a windfall from Ukraine-made cigarettes. A Web search for “cheap Ukrainian cigarettes” yields about two dozen online stores, most of them located in neighboring Moldova. The sites offer all the well-known brands, from Marlboro to Winston, with Ukrainian tax stamps and health warnings. The price is $22 for a carton (10 packs) of Marlboro — about three times cheaper than prices in the EU. The sellers claim that they will skip customs inspections at the destination country. If customs does try to charge a duty tax, customers are advised to reject the package and ask for their money back. Also plentiful on Ukrainian Internet sites are classified ads offering Ukrainian cigarettes delivered to the EU “in large quantities,” “on constant basis” and “without any paperwork.”

Konstantin Krasovsky, of the Ukraine Ministry of Health, says tobacco companies are doing little to stop smuggling. In Krasovsky’s view, the only way to halt smuggling is to make the trade unprofitable for manufacturers. He and other tobacco control advocates propose that, much like in the Philip Morris-EU agreement, tobacco companies in Ukraine be forced to buy back their seized cigarettes at market prices.